DS News - U.S. Bank

26 ASK THE ECONOMIST HEAR DIRECTLY FROM TODAY'S LEADING MARKET EXPERTS. Natalya Vinokurova's research focuses on understanding how decisions get made in the real world and how these decision-making processes evolve over time. It involves studying patterns of decision-making in contexts ranging from heart surgery and mortgage-backed securities (MBS) to nuclear power. Vinokurova's dissertation on MBS investigates how the use of analogical reasoning facilitated both the development and the collapse of the market for these securities in the United States. She's currently working on research that gives insight into the history of mortgage ownership recording. Vinokurova, who holds a Ph.D. in Business Administration, from Stern School of Business, New York University spoke to DS News on what she learned from her research on MBS and if the housing market is poised to deal with the next crisis. What are the lessons that the financial services industry still hasn't learned from the 2008 mortgage crisis? e issue of systematic risks comes to mind immediately when we speak of lessons that the financial industry has still not learned from the crisis. One of the underlying causes of the 2008 crisis was the market participants' failure to appreciate that some risks, including the interest rate risk and the credit risk, affect the economy as a whole and, thus, could not be insured by private actors. And yet, the attempts to offer private insurance for these risks, for instance, through use of self-insurance devices such as tranching continue despite the failure of tranching to protect investors from prepay- ment risk in the early 1990s and default risk in 2008. e failure of the private mortgage insurance companies in the aftermath of 2008 as well as the Great Depression also seems to be fading from memory. One of your papers looks at how MBS issuers convinced investors that they were bonds. Can you share your findings from this study? In the 1970s and 1980s, MBS issuers succeeded in changing the definition of a bond to include securities that exposed investors to prepayment risk, made variable monthly payments of principal and interest, and did not constitute debt obligations of their issuers. rough my research, I found that such an expanded definition allowed MBS issuers to sell their products to a much wider range of investors than the individuals and institutions who were willing to invest in mortgages directly. Your study also revealed that it is extremely difficult to find a physical record or prospectus of some of the 30-year MBS. What do you suggest to ease the availability of these records? e first step to easing access to such records is to tighten the recordkeeping guidelines for the financial institutions issuing these securities. It stands to reason that securities issuers should keep the prospectus of the securities they issue to the public for at least as long as the securities are outstanding and that such records should be made freely available to the public. Additionally, my research suggests that a public depository of such records which keeps them available after the securities are paid off would help shore up the system's memory for financial innovations' evolution and the consequences of such evolution. What are some of the issues that are likely to impact the housing market moving forward? e relationship between wages and housing prices will continue to affect the housing market. e failure of real incomes to keep pace with housing inflation puts housing further out of reach of many wage earners. One major cause of the 2008 mortgage crisis was that the lenders Natalya Vinokurova Assistant Professor, Wharton School, University of Pennsylvania "One of the underlying causes of the 2008 crisis was the market participants' failure to appreciate that some risks, including the interest rate risk and the credit risk, affect the economy as a whole and, thus, could not be insured by private actors."

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